The UAE economy growth is expected to lower to 3.9 percent in 2012 after a solid 2011, when the GDP expanded 5.2 percent led by high oil prices and a 10.2 percent increase in oil production, according to a review of the UAE economy by Global Investment House.

Even as growth in oil sector is expected to slow down in 2012, the nonoil sector has continued its resurgence witnessing a 3.5 percent growth, on the strength of its services sector, manufacturing, utilities, and the recovering construction sector.

The economy is expected to grow 3.1 percent in 2013, led by nonoil sectors that would continue to see massive infrastructure spending, primarily in Abu Dhabi and Dubai.

The nonoil sector accounts for more than two-third of the overall UAE economy, the highest among GCC countries, led by the diversification drive initiated by the government. Looking forward, manufacturing, tourism and hospitality, transportation, trade, and personal services are expected to drive growth in the nonoil sector.

Oil sector, which contributed close to a half of the UAE economy a decade earlier, has declined to less than a third in 2011. With ever increasing demand for crude oil from Asia’s top economies — India and China — the UAE has increased its production and capacity over last three years and would continue to do so in the next five years. The UAE aims to expand its crude oil production capacity to 3.5 million b/d by 2018.

The UAE is expected to register both trade and current surplus in 2012, driven by high oil and nonoil exports. Trade surplus is forecast to increase 14.0 percent to $ 90.7 billion in 2012, following a 9.3 percent hike in oil exports and an 11.7 percent rise in nonoil exports.

Re-exports, which predominately include diamonds and jewelry, are also projected to surge 7.5 percent in the same period. Meanwhile, imports are expected to witness the least increase of 7.2 percent in 2012, with gold being the top imported commodity.

Current account surplus is expected to stay high, with an increase of 30.3 percent in 2012, backed by strong trade surplus. The growth in trade surplus is expected to more than offset the non-merchandise deficit, which is forecast to grow 3.8 percent to $ 50.7 billion in 2012.

Current account would continue to record surplus during the forecast period till 2017, as oil exports stabilize and the increase in nonoil exports and re-exports is offset by rising imports. Trade surplus is also expected to moderate to a 2.8 percent growth in 2013, led by a decline in oil exports.

The UAE attracted strong FDIs as investor confidence picked up, following the recovery in the economy. Net FDI inflows are expected to increase 3.6 percent to 5.7 billion in 2012, following a 57.1 percent increase in 2011. The UAE’s status as a safe destination for investments helped attract FDI into the country, as large amounts of capital fled the crisis-hit countries in the Middle East region.

In 2012, inflation slowed down to just 0.7 percent as compared to a steady 0.9 percent increase in the last two years, as housing markets continued to decelerate, causing property prices to continue trending downward. The housing component in the CPI, which accounts for 40.0 percent of the basket, fell 2.6 percent in 2012 in addition to the 2.4 percent decline in 2011.

Abu Dhabi registered 1.13 percent increase in CPI, while inflation in Dubai fell 1.7 percent in 2012. The remaining five Emirates registered above 2.5 percent increase in CPI. According to the Central Bank of UAE estimates, inflation is expected to accelerate to 1.0 percent in 2013 and range between 1.0–1.5 percent for the rest of the forecasted period till 2017.

The consolidated fiscal surplus is projected to have widened in 2012 in spite of higher capital spending by the Emirates, as revenue was bolstered by high oil prices. Consolidated capital spending is expected to increase 51.6 percent in 2012, while oil revenues would rise 11.6 percent in 2012. Consequently, fiscal surplus is expected to rise to 14.3 percent of the GDP in 2012 as compared to 13.2 percent in 2011.

Abu Dhabi is aiming to spend $ 89.8 billion over the next five years to construct homes, schools, roads and other vital infrastructure projects, while Dubai is considering resuming $ 1.1 billion worth of infrastructure projects. Abu Dhabi, which generates 90.0 percent of

UAE’s crude oil, plans to invest around $ 60.0 billion over the next five years to boost oil production capacity.

Following the Dubai debt crisis in 2009, the UAE central bank has focused on strengthening the banking sector and managing liquidity.

With the Emirates three-month Interbank Offered Rate at 1.3 percent since September 2012, its lowest point in over two years, liquidity has been ample in the market. With inflation under control, the Central Bank of UAE is expected to keep interest rates low 2013 onward, to support the lending growth in the economy.

Lending to households and government showed visible signs of improvement in the first 10 months of 2012, as personal consumption and government spending remained high.

Both consumer loans and government financing grew 16.4 percent each in the first 10 months of 2012. Lending to transport and communications sector also rose 13.6 percent, as the government sought private sector partnership to implement some of the key infrastructure projects, including the expansion of airports.

Broad money supply (M3) grew 8.2 percent in 2012, led by double-digit growth (13.3 percent) in M1 as a result of strong inflow of demand deposits and over quarter percent increase in government deposits. Foreign deposits grew at faster pace (5.0 percent YoY), while domestic time and savings deposits registered a 3.0 percent YoY decline in the third quarter of 2012.